(Reuters Breakingviews) - The largest buyout of a U.S-listed Chinese company looks like an easy sale. A group including private equity firms Warburg Pincus and General Atlantic is leading an $8.7 billion deal for classifieds site 58.com. The 20% premium is decent for a business that has fallen out of favour and provides a clean exit from an inhospitable market.
Known as China’s answer to Craigslist, 58.com has had a rough ride as a public company. After listing in New York seven years ago, its shares peaked at nearly $90 apiece in 2018 before beginning a downward slide. Feverish competition was partly to blame. U.S. fund managers also started gravitating toward sexier video-streaming and e-commerce options. Covid-19 has slowed new property and jobs listings, which will weigh on advertising revenue.
Even so, the offer – a fifth higher than the undisturbed share price in April, when 58.com first disclosed the approach – values the company at roughly 19 times forecast 2021 earnings, broadly in line with smaller rival 51job. Classifieds may be comparatively boring these days, but it’s a high-margin business with predictable cash flows that has been lucrative for private equity before. In 2018, Hellman & Friedman more than tripled its money from Germany’s Scout24, while Apax Partners quintupled its investment in Britain’s Auto Trader.
58.com should be no exception. Its rate of growth may be decelerating, but it also increased sales 19% last year to $2.2 billion. The company has no debt, making it easier for the buying consortium to use some of the $3.5 billion it is borrowing to juice returns. 58.com Chief Executive Jinbo Yao and his backers will ultimately need to win over Chinese internet giant Tencent, which holds a decisive 28% voting stake.
Leaving New York will give 58.com an increasingly popular option of returning home, where tech valuations are typically higher. Peers such as JD.com and NetEase have established secondary listings in Hong Kong in part to hedge a U.S. backlash against Chinese companies, but they have more Covid-19-proof business models, making their listings an easier sell. Sitting out the pandemic in private hands looks smarter for 58.com. And a better reception probably awaits someday in Hong Kong or Shanghai.
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